Franchise Failure – What Would You Do?

The following is an excerpt from a recent article on CNBC.com about business failure. The article, Five Businesses That Did Not Survive 2011 included one business that was a franchise… actually, a franchisor, Just Mouldings. The excerpt about Just Mouldings demise was subtitled, “We Did Everything Right”.

In my ongoing dedication to franchise success at all levels, I always attempt to analyze why a franchise business succeeds, and why one would fail. As we work our way out of economic uncertainty I’m sure we’ll have more and more opportunity for analysis, and as the excerpt details, we’ll see more identified as business failure due to the economy… which was listed as the reason for Just Mouldings’ failure.

In this case, the principals stated, “We did everything right” and I’m sure they truly believed they did. I’m also sure they did all they felt they could do. Especially as they faced an uphill battle of selling a non-essential product in an economy that saw many consumers limit their spending to necessities.

So, let’s put on our thinking caps and dig into our extensive experience in franchising and business management and attempt to define how this franchise could have succeeded. Let’s look at this as a workshop of sorts. After reading the excerpt below, please share your thoughts as to what you might have done differently if you were in the position of leading this franchise.

Certainly, this is not an attempt at diminishing the efforts of the Just Mouldings’ principals. Instead, let’s look at this as an exercise where we can assist other franchisors (and franchisees) that may be facing similar challenges. If, through our collective efforts, we can assist franchise businesses from failing, even if it’s just one, then we’ve accomplished a great deal. And, it may just help someone from losing their life savings, or help franchisees within a failing franchise system cope and survive despite franchisor failure.

‘We Did Everything Right’

Just Moulding, based in Gaithersburg, Md., sold and installed decorative molding. It opened in 2004 and closed last April.

AT ITS PEAK Mark Rubin and Kevin Wales started with a single workshop that handled small jobs larger installers did not want. In 2007 things were going so well they decided to sell franchises in the business and raised $700,000 from 21 investors. After Mr. Wales left the company in 2010, Mr. Rubin’s father-in-law, Richard Hayman, took over as president. Soon after, sales increased by 20 percent and the company became profitable.

WHAT WENT WRONG The recession. The company, Mr. Hayman said, sold a product that people wanted but did not need: “It was crown molding, not a furnace or a roof.” And while the business had the high legal and accounting costs associated with selling franchises, it had sold only three by the end of 2009. Potential franchisees had trouble raising the $100,000 to $250,000 needed to get started.

LOOKING BACK “We did everything right,” said Mr. Hayman, who sank $470,000 into the company. “We hired the best people and had a great product. We could not overcome the bad economy.” He and Mr. Rubin declined to discuss what they are doing now.

10 thoughts on “Franchise Failure – What Would You Do?”

A good friend of ours, Joe Caruso, often tells me that a franchise concept should not be a menu item… I guess we could consider moulding as a typical menu item for home improvement. It’s a profitable item when bundled with other home improvement services, but not enough of desired product standing alone.

Thanks for chiming in, Brian. Even though we have little information to start with it is good to use this as an exericse to develop a line of questioning… So, with that in mind and in line with your comment, what questions would you ask when presented with the little facts that have already been presented?

Kate, thank you for sharing your insight and persepctive. You make some very good points. Certainly, we don’t have all the information necessary to make solid recommendations but it is a good exercise to define some of the things necessary when considering franchising. I agree that maybe $700k could have been better spent by putting towards employee installers, a company operation… not sure if they had a corporate unit or not.

I agree with your thoughts about developing in-house line extensions and possibly expanding more into home improvement. Although, I would have recommended remaining more of a specialist as opposed to “doing everything.” I would have also suggested developing key strategic alliances with home improvement companies to provide moulding and other custom-type finish products, as well as cross-promotion with those alliances.

Having worked with many franchisees across many industry segments in service franchise sector I have found many franchisees have little or no experience in sales. In a down-economy this has stuck out like a sore thumb. So, to that end, I would have also recommended sales training for franchisees, and expand the same to include social networking and showing them how to use the same within their sales efforts.

The owner said it all. “The company, Mr. Hayman said, sold a product that people wanted but did not need.” In 2004 when they started home equity was free flowing as you recall. A high tide floats all boats and their business model was a niche at best within the vast home improvement space. So, in my opinion doing everything right in a business where the product is ultimately discretionary is failed out of the gate.

There are many factors we do not know to “go to school” on this case. We know nothing about the base business model before they started franchising; how profitable, volatility of margins on cost of goods, operating costs, distribution systems in place, approved vendors, customer profile (homeowners, mass or specialty retailers) initial scale of franchising (state/region/nation), why accounting costs were so high, what franchise selling system did they develop, what fee structure did they charge, why did it cost $250,000 for a franchisee to get started.

I’m sure I’ve left out many crucial factors from the list, but noting “doing everything right” in the context of product and people doesn’t convey the understanding that franchising is a separate business process. So we don’t know much about the base business and nothing about their franchising infrastructure so this case is going to be difficult to provide valuable insights.

Hi Paul,
Well done for starting this conversation. Business failure isn’t pleasant but it is a fact of life, and there’s value in looking back at our own and other people’s experiences. Hopefully our thinking muscles then develop so we can make better informed decisions in future!

Here are some thoughts on what this situation highlights for me. I tend to like ‘what can we learn’ rather than “what I would do”, since none of us can tell that. So, no answers here, just questions and comments.

1. Sometimes ‘stuff’ (like GFC, massive technology change etc) happens and despite efforts and past success etc, things don’t work out. Franchise businesses fail, and it’s a measure of our maturity (or not) as an industry that we can be straightforward about this.
2. Can be dangerous to think and say “we did everything right” (which the principals may or may not actually have said). Very hard to learn if we adopt that mindset. However, the legal issues around franchising seem to make this the natural response. Good for us all to think about how we communicate and share our experiences so others in the industry can learn from them.
3. If business is built on ‘overflow work’ or a niche or single product, there is a real threat if technology, economics etc means the big players take it back. Ask how will we sustain advantage in market place? How are we innovating etc? I think prospects are going to be looking at this in future. This doesn’t mean niches are a problem, just that we should recognise the issues and deal with it appropriately.
4. Franchising of ‘installation’ type services surely needs a strong, reliable source of business. I’ve seen some models where this does work, so it’s possible under some circumstances. Highlights importance of looking carefully at the business model and what distribution channels work for that. e.g. Could Just Moulding have made money by using the $700k to put on employee installers, with some sort of incentive plan?
5. Caution needed when franchising something that hasn’t reached place of regular profit, including profitable operation of the ‘test model’. If a business is relying on selling franchises to put money in bank to pay wages/loans, make sure you’ve got plenty of capital.
6. Ask: is the price point for franchises attainable? What is the payback period and what is that contingent on? Asking questions like these can help manage risk and anticipate threats.

This is a great exercise. There are many more things that could probably be dug out from this simple inquiry. It highlights the importance of looking at how a business makes money, and how/how quickly it can add customers and franchisees.

Clearly the economy would have played a major role in a business of this dimension given the type of luxury item it produced and sold. It would seem logical at the time to have looked for ancillary products to add to beef to the business and try to make the business less exposed to economic fluctuations. The company could have looked for cheap licensing solutions or developed in house line extensions delving further into home improvement.